Osborne’s cuts are merely the first step
IT was Philip Hammond, the Tory shadow chief secretary to the Treasury, who put it best last night. He readily explained that the package of spending cuts and reforms outlined by his party yesterday were only a start and that there would be more to come. His frankness came as something of a relief after a day when relatively modest, long-term ideas were given exaggerated significance by many commentators.
Yesterday’s proposals to trim spending are to be welcomed but amount to at best £7bn a year; yet the budget deficit this year could hit £200bn. Freezing public sector wages for those earning over £18,000 is a brave decision given the election is less than a year away; but it will save just £3.2bn in 2011. It goes no more than 1-2 per cent of the way towards eliminating the structural part of the deficit.
The other reforms won’t plug the gap either. Some middle-class families will lose child tax credits and other minor perks, which makes sense. Many of the other policies need fleshing out, not least the claim that the Tories would crack down on gold-plated pensions for civil servants (this sounds more like an aspiration) and the supposed one-third cut to the Whitehall bureaucracy. Their pledge to combat the effect of Gordon Brown’s infamous 1997 tax grab on pension funds is unlikely ever to materialise. Raising the retirement age to sixty-six is overdue; the problem is that the process will take too long and doesn’t go far enough. In any case, the full fiscal benefits of the reform will not be realised until after 2020.
The Tories clearly want to signal that they are willing to cut spending, even though this will upset many interest groups; but they don’t want to be too explicit about the scale of the cuts, in part because they remain scared of the electorate’s reaction.
It is also hard to know how to interpret Osborne’s warning to bankers that they shouldn’t put bonuses before rebuilding balance sheets. He may be planning a windfall tax on bank profits – he may even claim that he is merely following in Margaret Thatcher’s footsteps. Her chancellor Lord Howe slapped a one-off tax on retail banks in 1981, in radically different circumstances. The uncompetitive structure of retail banking at the time meant profits were closely linked to the base rate, partly because deposits usually did not pay interest. The Bank of England had hiked base rates to sky-high levels to combat rampant inflation, delivering a huge rise in profits. A 2.5 per cent tax was levied on non-interest bearing current account deposits, raising £350m. But in the current environment it would be madness to slap a windfall tax on global City firms; let us hope that Osborne was merely pandering to anti-bank sentiment.
Yet he is still willing to concede too much to his opponents (it now seems the inheritance tax cut won’t happen for several years) and still hasn’t come up with a plan to liberate Britain’s supply-side or to boost competitiveness. Labour’s disastrous 50p tax rate will remain for the duration of the public sector pay freeze, contradicting the previous Tory policy that it would be eliminated if it transpired that it didn’t raise any money. It is good that the Tories realise the scale of the task ahead. But they will have to add more meat to their plans over the next few months if they are to gain a real mandate to rule as an austerity government. allister.heath@cityam.com